Volcker Alliance Gives Washington B- Grade for “Truth and Integrity in State Budgeting.” That’s Better than Many.

Washington receives so-so grades on the Volcker Alliance’s report, “Truth and Integrity in State Budgeting: What is the Reality?” We’ll go right to the report card’s three-year averages: 

  • Budget Forecasting: A
  • Budget Maneuvers: B
  • Legacy Costs: D
  • Reserve Funds: A
  • Transparency: B

By our calculation, that’s a solid B. It drops a bit, to a B- when you go to the 2017 scores. 

  • Budget Forecasting: A
  • Budget Maneuvers: C
  • Legacy Costs: D
  • Reserve Funds: A
  • Transparency: B

The long-term concern, of course, is with the legacy costs. Coupled with budget maneuvers, the Volcker Alliance ratings suggest problems may be coming. The issues are similar to that reflected in the Mercatus Center report on state budgets

A couple of concerns strike us.

  • Budget solvency measures whether a state can cover its fiscal year spending using current revenues. Did it run a shortfall during the year? (Washington ranks 43rd.)
  • Long-run solvency measures whether a state has a hedge against large long-term liabilities. Are enough assets available to cushion the state from potential shocks or long-term fiscal risks? (Washington ranks 38th.)

Governing Magazine reports on the Volcker group’s efforts. 

The report grades states in five critical areas: forecasting accuracy; oversight and use of rainy day funds and other fiscal reserves; use of one-time fixes; adequately funding employee pensions and other benefits; and disclosing budget and related financial information.

The area in which states collectively performed at their worst was long-term liabilities, such as pensions and retiree health care. States face nearly $2 trillion in these unfunded liabilities. The report dinged 19 of them with a D or D-, the lowest grades possible. “Those legacy costs are the millstone hanging around a lot of states’ and cities’ necks right now,” says William Glasgall, who helped co-author the report.

Washington, then, has plenty of company, according to the Volcker report.

Overall, 

The average grade earned for nearly all five categories was a B; states averaged a C grade for managing their long-term liabilities.

The exercise appears to be quite thorough and professional. 

Critical to this work has been the cooperation of eleven universities, each with a demonstrably strong interest in public service education and particularly in the management of state and local governments. Faculty and students in the fields of public finance and budgeting have reviewed the budgets and financial reports of each state for fiscal 2015 through 2017 in terms of their timeliness, comprehensiveness, transparency, and willingness to fund current expenditures with recurring sources of revenue rather than one-time infusions. The universities’ research efforts were augmented by Volcker Alliance staff and data consultants at Municipal Market Analytics, an independent research firm based in Concord, Massachusetts.

We recommend the report for a good overview of state budgets and insight into recommended best practices. Washington’s forecasting approach is highlighted. From the Governing story,

The report offers several policy recommendations, including having clear policies for withdrawing money from rainy day funds and other fiscal reserves; implementing rules for replenishing those funds; tying the size of fund balances to revenue volatility; and adopting a consensus approach to budget forecasting to reduce political influence. On that last item, the report highlights as a best practice Washington state’s Economic and Revenue Forecast Council, which includes representatives of the legislative and executive branches, as well as the state treasurer.

We agree and would also cite the four-year balanced budget requirement as a good model for states to follow. 

The Volcker report confirms the national concern with public employee pension costs. We’ve previously cited analysis suggesting pension costs are crowding out education funding and leading to deferred infrastructure investments. One analyst suggests Seattle’s income tax can be linked to the city’s looming pension shortfall

Stuff to watch.